Returns On Capital - An Important Metric For Lion Posim Berhad (KLSE:LIONPSIM)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Lion Posim Berhad's (KLSE:LIONPSIM) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Lion Posim Berhad is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.063 = RM37m ÷ (RM687m - RM108m) (Based on the trailing twelve months to September 2020).

Therefore, Lion Posim Berhad has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Trade Distributors industry average of 7.5%.

Check out our latest analysis for Lion Posim Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lion Posim Berhad's ROCE against it's prior returns. If you'd like to look at how Lion Posim Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at Lion Posim Berhad. The data shows that returns on capital have increased by 195% over the trailing five years. The company is now earning RM0.06 per dollar of capital employed. In regards to capital employed, Lion Posim Berhad appears to been achieving more with less, since the business is using 38% less capital to run its operation. Lion Posim Berhad may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

In Conclusion...

In a nutshell, we're pleased to see that Lion Posim Berhad has been able to generate higher returns from less capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Lion Posim Berhad does have some risks though, and we've spotted 2 warning signs for Lion Posim Berhad that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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